Average True Range (ATR)
A single number for how far a stock typically moves — perfect for sizing stops.
ATR (Average True Range)A single number for how far a stock typically moves. distils volatilityThe size of price swings — not their direction. into a single, practical number: roughly how far a stock moves in an average period, in its own price terms (rupees/points). A ₹3,000 stock might have an ATR of ₹60; a ₹50 stock an ATR of ₹2. It’s not about direction at all — purely typical range.
ATR’s killer use is *sizingDeciding how much to bet on each trade or holding. your stops and positions to the stock’s actual character*. A stopA pre-set exit that caps your loss if a trade goes wrong. must sit beyond the stock’s normal noise, or you’ll get shaken out by random wiggles — and “normal noise” is exactly what ATR measures. Placing a fixed ₹5 stopA pre-set exit that caps your loss if a trade goes wrong. on a stock that routinely swings ₹60 is absurd; placing it on one that moves ₹2 is also wrong. ATR lets you say “give this trade room equal to ~2× its typical range,” adapting your risk to each stock’s volatilityThe size of price swings — not their direction. instead of using one arbitrary number for all. It turns volatilityThe size of price swings — not their direction. from a vague worry into a concrete distance.
- StopA pre-set exit that caps your loss if a trade goes wrong. placement — set stops a multiple of ATR away (e.g. 1.5–3× ATR) so normal volatilityThe size of price swings — not their direction. doesn’t trigger them, but a real adverse move does.
- Position sizingDeciding how much to bet on each trade or holding. — combined with your risk budgetA plan for how you’ll spend and save your income., ATR (your stopA pre-set exit that caps your loss if a trade goes wrong. distance) determines how many sharesA unit of ownership in a company. to buy (covered in the risk module).
- VolatilityThe size of price swings — not their direction. comparison — ATR as a % of price lets you compare how “jumpy” different stocks are on a like-for-like basis.
ExampleA stock trades at ₹1,000 with an ATR of ₹25. A sensible stopA pre-set exit that caps your loss if a trade goes wrong. might sit ~2× ATR (₹50) below entry, at ₹950 — beyond the day-to-day noise. A ₹10 stopA pre-set exit that caps your loss if a trade goes wrong. would be inside normal wiggle and get hit constantly for no real reason.
Key takeawayATR expresses volatilityThe size of price swings — not their direction. as a single number: the stock’s typical move in its own price units. Its main use is sizingDeciding how much to bet on each trade or holding. stops and positions to each stock’s real volatilityThe size of price swings — not their direction. (e.g. stops at a multiple of ATR), so normal noise doesn’t stopA pre-set exit that caps your loss if a trade goes wrong. you out.
FAQs
Can ATR tell me when to buy or sell?
Not directionally — ATR has no view on which way price goes. It tells you *how much* a stock moves, which is invaluable for risk management (stop distance, position size) and for adjusting expectations, but you need separate tools (trend, momentum, patterns) to decide direction.